Interest rate cut of 0.5% and quantitative easing agreed by all

19 March 2009 / by Rebecca Sargent
The decision by the Bank of England's Monetary Policy Committee (MPC) to cut interest rates to 0.5 per cent and introduce quantitative easing was unanimous, the meeting's minutes have revealed.

Both measures were announced earlier this month in a bid to boost the UK economy, as economic data continues to show contraction for the foreseeable future.

The Bank base rate now stands at a record low, although the MPC considered keeping it at its previous level of one per cent, arguing that savings deposit rates, "could not fall much further, and if these institutions were contractually obliged to pass on cuts in Bank Rate to some of their borrowers, that would squeeze their profits further, and potentially reduce lending capacity."

However, the Bank made the unanimous decision to cut the rate based on the fact that it may still affect nominal spending and inflation, while increasing the effectiveness of, "the further measures which were likely to be needed to ease the stance of monetary policy."

Further measures came in the form of quantitative easing this month, when the MPC also unanimously voted to use the Asset Purchase Facility to increase the supply of money in the economy.

The MPC voted to allow the purchase of £75billion worth of assets initially, although the Chancellor has authorised up to £150billion.

The Bank added that assets would be purchased from the domestic non-bank financial sector, such as insurance and pension companies, through the creation of central bank reserves, which should inject fresh money into the economy.

It is hoped that the quantitative easing will keep inflation at its target in the medium term, but its true impact remains to be seen. Speaking at the time, director at Fairinvestment.co.uk, James Caldwell said:

"It is clear that more needs to be done to help consumers and small businesses, and only time will tell if quantitative easing will have the desired effect."

© Fair Investment Company Ltd